Private Money Deal Structuring?

[Matt Rothwell]

I'm finally almost done with the updates that I wanted to do on the duplex I bought last fall, which means that it's about time for me to start shopping for new deals. I'd prefer not to move and take another FHA loan; rather, I'd like to try giving private money a try. Keep in mind that I'm not interested in flipping. I'd really like to do buy and holds instead.

I seem to have stumbled upon a pretty great pool of contacts with a decent amount of cash to invest if I get my elevator pitch down right. A lot of the write-ups I’ve read on biggerpockets and elsewhere focus on how people cleverly find deals, and how they cleverly coax large sums of money from various sources. What they're usually fuzzy about is what they did to turn that money into a property. In other words, I’m not worried about getting the money; I’m more concerned with what to do with it. Well, I’d buy a house or two or ten with it…but how do I structure the deal?

The most obvious way that I’ve thought of is the structure the investment as a note. I.e., they give me $50,000, I pay them back at ~7% apr, like a regular loan. The pros/cons are:

Pros:

-Simple. It’s a loan, I just make payments back, and it’s easy to explain.

Cons:

-Can’t combine that with bank financing because most banks don’t want another lien on the property and I don’t think I could get anyone to invest without me putting the property as collateral. This means that I need to get several people in together, and that’s never easy.

-I don’t think it’s the most profitable way to do it--I’d pay a bunch in interest to these guys

The second idea I had was to have them invest in my company (yet to be created). They would invest in "Matt Rothwell Holdings LLC", and then my LLC would buy the property(ies) and distribute funds according to how much they invested.

Pros:

-Seems more scalable, I could see this working better in the long run.

-Matt Rothwell Holdings LLC could potentially get bank financing to go along with investor funding.

Cons:

-Matt Rothwell Holdings LLC does not exist yet. I'm thinking there's a good amount of money required to set up that company and then more money to file taxes every year.

-Complicated

-I have no idea how to structure this.

-Not sure, but I’m pretty sure the SEC gets involved here.

So these are just a couple ideas that I’ve brainstormed, but I’d love to hear examples of how others have setup private money deals. What did you get out of the deal, and what did your investors get?